Determining Expansion Revenue Goals in Customer Success via SOM Analysis

Rich Watson

When I was asked to build a Customer Success organization from the ground-up, having spent many years in sales leadership roles for SaaS businesses, I knew I would see CS through a growth tinted lens. Luckily for me, at the time, we were a Series A company, requiring exactly that mindset.

A growth focused CS leader (who is also responsible for revenue) will have two key goals:

1. Retention (What dollars renew based on the existing client base)
2. Expansion (What additional dollars are brought in through cross-sell / up-sell from the existing client base)

Each budget cycle, you will be posed with the question: What should your goals for retention and expansion be? Determining retention goals are generally based on industry benchmarks, so for this short piece, I wanted to share a framework I’ve utilized to help you determine expansion targets.

TAM-SAM-SOM

The easiest way to understand your total expansion market opportunity is to calculate your SOM [(Serviceable Obtainable Market) the delta between the TAM (Total Addressable Market) & your current book of business (or SAM)] on a per LOGO basis.

Step One: Calculating SOM

• The maximum price point x user (if a customer purchased your entire suite of products) x Total number of potential users within your existing LOGOs
• The above is also a way to determine your potential for cross-sell (new products) + up-sell (additional licenses of existing products)
• Subtract the existing revenue
• The remaining number is your SOM

Step Two: Removing customers from the SOM analysis

• Identified as a churn risk
• Have a closed/lost opportunity within the past (x) number of days (dependent on your business)
• Expansion products would not apply

Step Three: Determine the % of the SOM that can be obtained within a given fiscal period

• This should be based on historical performance (% attainment of SOM for previous FY) and is likely a negotiation between CEO/CFO/CCO/BoD.

How have you determined expansion goals for your SaaS business?

[Deleted User]

This is an amazing post, @Rich Watson, thank you for sharing it here. This is something I think we don't have enough of in the customer success world yet. Business metric-driven planning. The execution will always be customer-centric but this methodology answer (for execs and boards) the question of "why do we need customer success?"

Edan Golomb

@Rich Watson to clarify Step Three "Determine the % of SOM that can be attained at a given fiscal period" I would put some numbers behind that. 

I would take your SOM x Average PPU to determine the Expansion revenue in a fiscal year e.g., 50,000 users at $200 PPU = $10M in expand revenue

In a high-growth SaaS orgs, Sales should bring 25-30% of this expansion number. Multiply the expand revenue by the CSM portion, in this case 75%, which brings you to an annual target of $7.5M in CSM expand revenue. 

Then, to distribute the quota, look at what phase of the customer journey expansion revenue comes from (do customers expand right after onboarding, are they waiting till renewal?) Then look at how many accounts a particular CSM has that fit the ideal window and allocate Quota based on the SOM that is in that window. 

E.g., a CSM that has 5000 customers worth of SOM out of which 75% are out of Onboarding should have a quota of 5000 x 200 x .75 = $750,000

Let me know your thoughts.

Rich Watson

@Edan Golomb Good points - I think the sales vs CSM split is co x co - but I do agree with your point re: customer journey.

For example, let's say a companies contracts run 3 years long - you generally have a better chance of expanding a LOGO at time of their renewal vs. mid-contract. If this is true (Based on data, of course) this is yet another constraint on the % attainment of the SOM in a given FY. 

Rich Watson

Thank you @Jay Nathan! I am seeing many more organizations split revenue responsibility between sales and CS. I believe this trend will continue to optimize both growth + retention.